Blame Testosterone for Stock Market Bubbles
A new study suggests increasing testosterone levels in men, who make up the majority of professional stock market traders, causes them to bid up prices, which create price bubbles and crashes.
The study, “The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading,” was conducted by Amos Nadler of the Ivey Business School at Western University, Peiran Jiao of the University of Oxford, Paul Zak and Veronika Alexander of the Center for Neuroeconomics Studies at Claremont Graduate University, and Cameron Johnson at the Behavioral Health Institute at Loma Linda.
The double blind study involved 140 young males, each of whom received a topical gel containing either testosterone or a placebo, prior to participating in an experimental asset market in which they were able to post bid and ask prices, as well as buy and sell financial assets to earn real money.
The authors found that among groups that received testosterone relative to those who received a placebo, larger price bubbles formed, mispricing lasted longer, market dynamics changed to reflect increasing bidding and selling volume, and their perception of a stock’s value changed despite its being displayed throughout the study. While the traders who received the placebo displayed “buy low to sell high” behavior, those who had received testosterone adhered to “buy high to sell higher.”
“This research suggests the need to consider hormonal influences on decision-making in professional settings, because biological factors can exacerbate capital risk,” said Nadler. “Perhaps the simplest recommendation is to implement ‘cool down’ periods to interrupt exceptionally positive feedback cycles and return the focus to assets’ fundamental valuations to reduce the possibility of biased decision-making.”
“Based on our findings, professional traders, investment advisories, and hedge funds should limit the risk taken by young male traders,” continued Nadler. “This is the first study to have shown that testosterone changes the way the brain calculates value and returns in the stock market and therefore – testosterone’s neurologic influence will cause traders to make suboptimal decisions unless systems prevent them from occurring.”
Drying Up the North American Monsoon
The abundant summer rains that sweep across the southwestern United States and northwestern Mexico is known to scientists as the “North American monsoon.”
Previous general circulation models have suggested that the monsoons were simply shifting later, with decreased rains through July but increased precipitation in September and October.
“The consensus had been that global warming was delaying the monsoon … which is also what we found with the simulation if you didn’t correct the SST biases,” Salvatore Pascale, a NOAA scientist, said. “Uncontrolled, the SST biases can considerably change the response. They can trick us, introducing artefacts that are not real.”
Once those biases were corrected for, the researchers discovered that the monsoon is not simply delayed, but that the total precipitation is facing a dramatic reduction.
That has significant implications for regional policymakers, explained Sarah Kapnick, another NOAA researcher. “Water infrastructure projects take years to a decade to plan and build and can last decades. They require knowledge of future climate … to ensure water supply in dry years. We had known previously that other broadly used global models didn’t have a proper North American monsoon. This study addresses this need and highlights what we need to do to improve models for the North American monsoon and understanding water in the southwest.”
The new model also suggests that the region’s famous thunderstorms may become less common, as the decreased rain is associated with increased stability in the lower-to-middle troposphere and weakened atmospheric convection.
“The North American monsoon is also related to extreme precipitation events that can cause flash floods and loss of life,” Kapnick said. “Knowing when the monsoon will start and predicting when major events will happen can be used for early warnings and planning to avoid loss of life and property damage. This paper represents the first major step towards building better systems for predicting the monsoon rains.”
The researchers chose to tackle the region in part because previous, coarser-resolution models had shown that this area would be drying out, a prediction that has been borne out in the droughts and wildfires of recent years. But most of those droughts are attributed to the change in winter storms, said Pascale.
“The storm track is projected to shift northward, so these regions might get less rain in winter, but it was very uncertain what happens to the monsoon, which is the other contributor to the rains of the region. We didn’t know, and it’s crucial to know,” he said.
In their model, the researchers were able to tease out the impacts of one factor at a time, which allowed them to investigate and quantify the monsoon response to the doubling of atmospheric carbon dioxide, increased temperatures and other individual changes.
Pascale stressed the limits of this or any other climate model. “They need to be used with an understanding of their shortcomings and utilized to their expected potential but no further. They can give us quite reliable information about the large scale atmospheric circulation, but if you want to look at the regional, small-scale effects, you have to be very careful,” he said. “Models are critical but they are not perfect, and small imperfections can lead to big misunderstandings.”
He continued: “We are not saying, ‘We are sure that this is what will be,’ but we wanted to point out some mechanisms which are key, and have to be taken into account in future research on the North American monsoon. This is a difficult region, so future research will point out if we were right, and to what extent.”
The study was published Oct. 9 in the journal Nature Climate Change.